Changes could see banks shoulder up to 10% of the losses related to house-loan defaults

OTTAWA—Canada is proposing a major shake-up of its taxpayer-backed mortgage-insurance system that could see banks shoulder up to 10% of the losses related to house-loan defaults.

The plans were detailed in a policy paper issued Friday by Canada’s finance department as the government looks to shift some of the risk associated with the country’s housing market from taxpayers to the financial services industry. The proposals build on...